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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

In Re: Stock Exchanges Options Trading Antitrust Litigation

This Document Relates To:

ALL ACTIONS

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Master Docket No. M-21-79 (RCC)
99 Civ. 0952
MDL No. 1283

MEMORANDUM OF UNITED STATES OF AMERICA AS AMICUS CURIAE IN
OPPOSITION TO MOTION OF OPTIONS EXCHANGE DEFENDANTS TO DISMISS
CONSOLIDATED ANTITRUST CLASS ACTION COMPLAINT

MEMORANDUM OF UNITED STATES OF AMERICA AS AMICUS CURIAE IN
OPPOSITION TO MOTION OF OPTIONS EXCHANGE DEFENDANTS TO DISMISS
CONSOLIDATED ANTITRUST CLASS ACTION COMPLAINT

The United States submits this Memorandum to express its view that the federal antitrust
laws are not impliedly repealed with respect to agreements, prohibited by the Securities and
Exchange Commission ("SEC"), not to list options on more than one exchange.

INTEREST OF THE UNITED STATES

The United States has primary responsibility for enforcing the federal antitrust laws,
which express the nation's fundamental economic policy in favor of free competition.
Although in some circumstances the design of federal regulatory programs clearly indicates
that Congress intended this policy to defer to other federal policies, such implied antitrust
immunity must be found only when and to the extent necessary to make a federal regulatory
program work as Congress intended. The United States is concerned that the Exchange
Defendants' arguments for implied antitrust immunity here, if accepted, would unjustifiably
restrict application of the antitrust laws and cause serious damage to the nation's fundamental
economic policy. The Antitrust Division of the U.S. Department of Justice is currently
investigating possible agreements not to list options on more than one exchange.

STATEMENT

1. The Consolidated Antitrust Class Action Complaint ("Complaint") alleges that
five
national securities exchanges (the "Exchange Defendants") and others agreed among
themselves that they would not multiply list options (i.e., list the same option class on more
than one exchange) that already were listed by one of the exchanges. Complaint
¶¶ 1,3.
Plaintiffs allege that such an agreement is a per se violation of Section 1 of the Sherman
Act,
id. ¶¶ 4, 8, and we assume for purposes of this Memorandum
that the allegation is correct --
provided only that no implied repeal of the antitrust laws applies to that agreement. The
Complaint notes that "the U.S. Department of Justice . . . announced that it
had subpoenaed
records from the [exchanges] concerning, 'agreements' between various Defendants 'in
artificial . . . restraint of trade.'" Complaint ¶ 156. These
subpoenas relate to an ongoing
Antitrust Division investigation.

2. SEC Rule 19c-5 provides that the rules of each national securities exchange "shall
provide" that "no rule, stated policy, practice, or interpretation of this exchange shall prohibit
or condition, or be construed to prohibit or condition or otherwise limit, directly or indirectly,
the ability of this exchange to list any stock options class because that options class is listed on
another options exchange." 17 C.F.R. 240.19c-5(a)(3). As the SEC explained, the national
securities exchanges "are prohibited from restricting the listing of any new stock options class
to a single exchange." 54 Fed. Reg. 23963, 23963 (June 5, 1989).

The SEC proposed this rule after preliminarily determining that "exchange rules
prohibiting multiple trading may now be inconsistent with the [Securities Exchange Act of
1934, as amended], particularly because they may impose a burden on competition no longer
necessary in furtherance of the Act's purposes." Id. at 23965. It explained that it
proposed
the rule pursuant to statutory provisions that "codify a Congressional intent that the U.S.
securities markets, including options markets, be free from competitive restraints to the
furthest extent possible consistent with the other goals of the Act." Id. at 23970.(1)

The alleged agreement, if it exists, appears to contravene Rule 19c-5. We do not
understand the Exchange Defendants to contend that it does not, at least for purposes of their
motion to dismiss.(2)

3. The Exchange Defendants have now moved to dismiss the complaint, pursuant to
Rule
12(b)(6), Fed. R. Civ. P., on the ground that "Congress has impliedly repealed the antitrust
laws as those laws might be applied to conduct of the exchanges relating to the listing of option
classes, and replaced them with a regulatory scheme," Memorandum of Law in Support of
Options Exchange Defendants' Motion to Dismiss Consolidated Antitrust Class Action
Complaint ("E.D. Mem.") 2, even as to conduct the regulators have, in the exercise of their
statutory authority, determined to burden competition in a way unnecessary to further the
purposes of the Securities and Exchange Act of 1934, as amended by the Securities Act
Amendments of 1975 (the "Exchange Act").(3)

ARGUMENT

Congress Has Not Impliedly Repealed The Federal Antitrust Laws With Respect
to
Anticompetitive Exchange Conduct that Contravenes Rule 19c-5.

Congress, of course, may provide explicitly by statute that a particular corner of
commerce is to be governed by some regulatory scheme to the complete exclusion of the
federal antitrust laws. Moreover, statutes establishing regulatory regimes may, but do not
necessarily, imply congressional intent to exclude the federal antitrust laws to some extent.

As the Exchange Defendants concede, the Exchange Act contains no express provision
immunizing the conduct alleged in this case from antitrust scrutiny. The courts have found
implied antitrust immunity for certain conduct within the jurisdiction of the SEC and (a)
authorized by statute until barred by regulatory decision, or (b) approved by the regulators.
But neither the Supreme Court nor the courts of appeals have ever gone to the extreme
required by the Exchange Defendants' argument here; never have they held that there is
implied immunity from the federal antitrust laws for conduct that is prohibited by the
SEC. In
the absence of strong reason to believe that Congress intended to deprive those injured by
anticompetitive conduct of their ordinary antitrust remedies and to leave both punishment and
deterrence of anticompetitive conspiracies to administrative procedures, this Court should not
take the extraordinary step Exchange Defendants urge upon it.

Implied Antitrust Immunities Are Disfavored, and When Found At All
Are
Strictly Limited

Businesses frequently believe their lot would be improved were they free from the
federal
antitrust laws, and so "claims of antitrust immunity in the context of various regulated
industries," National Gerimedical Hospital and Gerontology Center v. Blue Cross of Kansas
City, 452 U.S. 378, 388 (1981), are frequent as well. As a result, "[t]he general principles
applicable to such claims are well established," id., although not mentioned by the
Exchange
Defendants. Because "[t]he antitrust laws represent a 'fundamental national economic policy,'
id., quotingCarnation Co. v. Pacific Westbound Conference, 383 U.S.
213, 218 (1966),
"'[i]mplied antitrust immunity is not favored, and can be justified only by a convincing
showing of clear repugnancy between the antitrust laws and the regulatory system.'"
Id.,
quotingUnited States v. National Association of Securities Dealers, 422 U.S.
694, 719-20
(1975) ("NASD"). In particular, "'Repeal is to be regarded as implied only if necessary
to
make the [subsequent law] work, and even then only to the minimum extent necessary. This is
the guiding principle to reconciliation of the two statutory schemes.'" Id.,
quotingSilver v.
New York Stock Exchange, 373 U.S. 341, 357 (1963).

In applying these principles, even in the context of heavily regulated industries, the
Supreme Court has "refused . . . a blanket exemption, despite a clear
congressional finding
that some substitution of regulation for competition was necessary," id. at 392,
citingCarnation, 383 U.S. at 217-19 (declining to find "an unstated legislative purpose to free
the
shipping industry from the antitrust laws"); Otter Tail Power Co. v. United States, 410
U.S.
366, 373-74 (1973) (finding no legislative "purpose to insulate electric power companies from
the operation of the antitrust laws" despite Federal Power Commission regulation). Instead,
close examination of the statutory and regulatory context is required to determine whether
particular conduct is immune.

The Exchange Defendants rely on Gordon v. New York Stock Exchange, 422
U.S. 659
(1975), which they interpret to establish a much more liberal standard for inferences of
antitrust immunity in regulated industries. E.D. Mem. 13. They offer the following standard,
which they profess to draw from Gordon:

First, the court must determine whether the SEC is authorized by statute to
regulate and supervise the challenged conduct. Second, the court must
determine whether the SEC has exercised that authority. And third, the court
must inquire whether, on an ongoing basis, the SEC has the responsibility to
apply standards to the challenged conduct which are different from and could
conflict with the requirements of the antitrust laws.

Id. 13-14.(4)Gordon, however, does
not sanction any departure from the principle that implied
antitrust immunity is justified only by a convincing showing of clear repugnancy between the
antitrust laws and the regulatory scheme. Indeed, the Court expressly reaffirmed this principle
in Gordon, 422 U.S. at 682, and later cited Gordon as authority for the
principle in National
Gerimedical, 452 U.S. at 388.

Gordon addressed only conduct (fixing commission rates) approved by the SEC
at the time
it occurred. Although, as the Exchange Defendants point out, the SEC had changed its policy
by the time of the Court's decision so that it forbade fixed commission rates, E.D. Mem. 16;
E.D. Reply 7, the plaintiffs were seeking treble damages for an injury inflicted at a time when
the rate fixing was permitted by the Exchange Act and approved by the SEC.(5) Despite the
lack of conflict between regulatory policy and the antitrust laws as of the time of its decision,
the Court realized that to impose liability for conduct approved by the SEC at the time it
occurred would create just such a conflict and prevent the intended operation of the Exchange
Act should the SEC ever change its regulatory policy, as the Exchange Act permitted it to do.
422 U.S. at 689-91. It does not follow that the Court would have rejected application of the
antitrust laws to conduct prohibited by the SEC at the time it occurred.

NASD, on which the Exchange Defendants also rely, E.D. Mem. 16-17; E.D.
Reply 9-10, also does not address immunity for conduct disapproved by the SEC, for none of the
conduct there challenged had been disapproved. The Court concluded that the conduct at issue
in seven of the eight counts of the complaint in that case was authorized by the applicable
statute provided it did not "contravene any rules and regulations the [SEC] may prescribe" and
that it did not so contravene. 422 U.S. at 721. In the Court's view, Congress clearly intended
that mutual funds be authorized "to impose transferability of negotiability restrictions, subject
to [SEC] disapproval." Id. at 726. As to the remaining count, which addressed conduct
not
specifically authorized by statute, the Court, noting that the SEC "weighs competitive concerns
in the exercise of its continued supervisory responsibility," id. at 736, concluded that
"the
investiture of such pervasive supervisory authority in the SEC suggests that Congress intended
to lift the ban of the Sherman Act from association activities approved by the SEC."
Id. at
733 (emphasis added).(6)

In short, to claim immunity, the Exchange Defendants must convincingly show a "clear
repugnancy" between the applicable regulatory scheme and enforcement of the antitrust laws
against anticompetitive conduct prohibited by the regulatory scheme. They must show that to
make the regulatory scheme work, the antitrust laws must be repealed even as to conduct the
regulatory scheme has barred because it is unnecessarily anticompetitive.(7)

There Is No "Clear Repugnancy" Here Between Application of the
Antitrust Laws and the Regulatory Scheme

The Exchange Defendants offer no reason to believe that application of the federal
antitrust laws to anticompetitive conduct prohibited by SEC rule enacted pursuant to the
Exchange Act would prevent the Exchange Act from working precisely as intended, and we
are aware of none. Courts have in the past routinely held that the antitrust laws apply to
conduct either prohibited or not approved through the applicable regulatory scheme even
though the antitrust laws were repealed for approved conduct. Thus in United States v.
Borden Co., 308 U.S. 188, 197-201 (1939), the Court held that, although the Sherman Act
was repealed with respect to agricultural marketing agreements approved by the Secretary of
Agriculture pursuant to the Agricultural Marketing Agreement Act of 1937, it was not
repealed with respect to agricultural marketing agreements not so approved. And in
Carnation, 383 U.S. at 216-17, the Court concluded that price fixing agreements
approved by
the Federal Maritime Commission pursuant to the Shipping Act were exempt from the antitrust
laws although unapproved agreements remained subject to the antitrust laws.

In Ricci v. Chicago Mercantile Exchange, 409 U.S. 289 (1972), the Court
specifically
addressed the general problem that

arises when conduct seemingly within the reach of the antitrust laws is also at
least
arguably protected or prohibited by another regulatory statute enacted by Congress.
Often, but not always, the other regime includes an administrative agency with
authority to enforce the major provisions of the statute in accordance with that
statute's distinctive standards, which may or may not include concern for
competitive considerations.

409 U.S. at 299-300 (emphasis added). Ricci had brought an antitrust case challenging the
Chicago Mercantile Exchange's transfer of his membership to another, contending that the
transfer was contrary to the Exchange's rules, to the Commodity Exchange Act, and to the
Sherman Act. The Court, affirming a stay pending administrative proceedings before the
Commodity Exchange Commission pursuant to the Commodity Exchange Act, said that if the
transfer "was pursuant to a valid rule," the antitrust court would then have to consider
immunity. Id. at 303. "On the other hand, if . . . loss of his
membership was contrary to
Exchange rules, the antitrust action should very likely take its normal course, absent more
convincing indications of congressional intent than are present here that the jurisdictional and
remedial powers of the Commission are exclusive." Id. at 303-04.

In Strobl v. New York Mercantile Exchange, 768 F.2d 22, 24 (2d Cir. 1985), the
Court
of Appeals for the Second Circuit considered, and squarely rejected, the argument that
"conduct specifically prohibited by the Commodity Exchange Act cannot be the basis for a
treble damage award under the antitrust laws." Reading Gordon, Silver v. New
York Stock
Exchange, 373 U.S. 341 (1963), and other Supreme Court decisions to provide that implied
repeal of the antitrust laws may be found only "when such laws would prohibit an action that a
regulatory scheme might allow," 768 F.2d at 27, the court found no immunity because both
the Commodity Exchange Act and the antitrust laws prohibited the challenged conduct (price
manipulation), so there could be no conflict between the statutes.(8) Here, although the
Exchange Act does not bar the SEC from changing its policy and permitting agreements like
the one plaintiffs allege here, there is no possibility of conflict arising from a holding that the
antitrust laws continue to apply to conduct that contravenes SEC rules.

The Exchange Defendants offer no "more convincing indications of congressional
intent . . . that the jurisdictional and remedial powers of the Commission are
exclusive,"
Ricci, 409 U.S. at 303-04.(9) They suggest that if
exchange conduct "were subject to antitrust
scrutiny, courts applying the antitrust laws with their focus on competition might subject the
exchanges to different standards of conduct," E.D. Mem. 39, than the SEC applies. This
speculative risk, if it exists at all, is surely minimal if this court holds no more than that the
antitrust laws are not repealed with respect to conduct that SEC rules prohibit.(10) The SEC
itself is, by statute, charged with abrogating or disapproving exchange rules "having the effect
of a competitive restraint it finds to be neither necessary nor appropriate in furtherance of a
legitimate regulatory objective." S. Rep. No. 94-75, at 13 (1975), reprinted in 1975
U.S.C.C.A.N. 179, 191. There should be little conflict over what has been disapproved
under that standard.

The flimsiness of the Exchange Defendants' concerns is illustrated by their repeated
reliance on the SEC's approval of the transfer of the New York Stock Exchange's options
market operations to the Chicago Board Options Exchange. E.D. Mem. 39; E.D. Reply 19-20;
Reply Memorandum of Defendant New York Stock Exchange, Inc. in Further Support of
Motion to Dismiss 3-5. According to the Exchange Defendants, "the SEC considered whether
there was an agreement to refrain from multiple listing -- an issue presented in this action --
and concluded that there was not," E.D. Mem. 39, citing SEC Release No. 34-38541, SEC
Release No. 34-38542. Assuming there was any such SEC "conclusion,"(11) courts have ample
means of avoiding conflicts with administrative agencies over factual determinations without
ousting the antitrust laws. See note 10 supra.

Ultimately, the Exchange Defendants' concern is that "[t]he possibility that the SEC
could
change the rules relating to multiple listing of option classes again is not remote." E.D. Mem.
40. But the speculative possibility of a future conflict cannot justify blanket antitrust
immunity. The court can, and should, hold that the alleged conduct, which as alleged
contravenes both SEC rule and the Sherman Act, is, like other conspiracies in restraint of
trade, subject to the federal antitrust laws. To avoid any possible future conflict with SEC
regulatory policy, the court should consider including in any injunction language permitting
otherwise enjoined conduct should the SEC, acting pursuant to statutory authorization, permit
such conduct in the future.

CONCLUSION

The court should hold that there is no implied repeal of the antitrust laws with respect to
alleged conduct prohibited by SEC rule.

1. The rule provided a phase-in period, see 54 Fed. Reg.
23963, 23969 (June 5, 1989),
but has been fully in effect since December 1994. Complaint ¶17.

2. The plaintiffs state that the SEC has commenced its own
investigation of the alleged
conduct, Plaintiffs' Memorandum of Law in Opposition to Defendants' Motions to Dismiss the
Consolidated Antitrust Class Action Complaint ("P. Mem.") 7, and the Exchange Defendants
do not challenge that statement, but instead rely on it. Reply Memorandum of Law in Support
of Options Exchange Defendants' Motion to Dismiss Consolidated Antitrust Class Action
Complaint ("E.D. Reply") 13.

4. The Exchange Defendants may not view this standard as
applicable beyond the SEC
context, thus implicitly relying on the analyses of the specific statutes, regulatory policies, and
regulatory actions in Gordon and other cases. If limited to the SEC context, their
argument is
erroneous only with respect to that context.

5. Gordon, filed in 1971, included a claim for treble
damages of $1.5 billion. 422 U.S.
at 661 n.3. The challenged rates had been subject to "the scrutiny and approval of the
SEC."
Id. at 689 (emphasis added).

6. Neither Finnegan v. Campeau Corp., 915 F.2d 824 (2d
Cir. 1990), E.D. Mem. 18,
nor Harding v. American Stock Exchange, Inc., 527 F.2d 1366 (5th Cir. 1976), E.D.
Mem.
19, speaks to implied repeal with respect to disapproved conduct. In Finnegan, the
Second
Circuit concluded that statute and regulation permitted the challenged joint bidding for
corporate control: "Congress has allowed competing bidders to make a joint bid under the
Williams Act and the SEC's regulations." 915 F.2d at 830. In Harding, the challenged
conduct by an exchange was both pursuant to an exchange rule subject to the usual SEC
control and covered by a formal order of the SEC in the particular case. 527 F.2d at 1370.

7. There is no need for this Court to address whether the alleged
Exchange Defendant
conduct would be immune from antitrust scrutiny if the SEC had in fact approved it. The
Exchange Defendants have not claimed such approval. Should the question ever arise, we
assume it would be resolved by applying the applicable general principles in light of
Gordon
and NASD.

8. The court also rejected the argument, supported by two cases from
the Northern
District of Illinois, that because there was an implied private right of action under the
Commodity Exchange Act, with damage, statute of limitations, and other features that differed
from those under the antitrust laws, no right of action was available under the antitrust laws
because of the "specific over general" principle even though there was no implied repeal of the
antitrust laws. 768 F.2d at 29-31.

9. Legislative history suggests that Congress assumed the antitrust
laws would continue to
apply as the SEC facilitated the development of a national market system, subject to "any
ultimate judicial reconciliation of the policies of the Exchange Act with those of the antitrust
laws." S. Rep. No. 94-75, at 12 (1975), reprinted in 1975 U.S.C.C.A.N. 179, 190.

10. Although this case clearly involves no diversity of standards of
conduct, there would
be ways to avoid conflict even in doubtful cases. Rejecting claims of a complete antitrust
exemption by implication from the Shipping Act in Carnation, the Court noted that in
prior
Shipping Act cases it had held that "courts must refrain from imposing antitrust sanctions for
activities of debatable legality under the Shipping Act in order to avoid the possibility of
conflict between the courts and the Commission," had concluded that primary jurisdiction to
make initial factual determinations should be vested in the Federal Maritime Commission, and
had ruled out "an unconditional injunction in the absence of a Commission determination
disapproving future operations under" the unapproved agreements. 383 U.S. at 220-21.
Similarly, the Court in Ricci affirmed a stay, 409 U.S. at 291, to permit the Commission
to
address certain issues of fact and the meaning of exchange rules. Id. at 305.

11. Release 34-38541 states that the SEC "disagrees with [the]
assertion that the Transfer
Agreement constitutes an illegal sale of a 'franchise' in NYSE Options," and that the SEC
believes that the NYSE's agreement to pay CBOE half a million dollars should NYSE decide
to reenter the options business within a year "does not constitute a 'noncompetition'
agreement." 62 Fed. Reg. 23516, 23519 (April 30, 1997). Release 34-38542 expands upon
this, saying that "there is no agreement between NYSE or CBOE to restrict dual listing of
options or to restrict, monopolize or foreclose any market." 62 Fed. Reg. 23521, 23524
(April 30, 1997). But it also strongly suggests the SEC did not intend these comments to
represent a conclusion that there was no agreement such as alleged here. The Release indicates
that these comments were based not on an SEC investigation, but rather on "the
representations of the NYSE," id. at 23523: "The Exchange states that the proposal is
not
monopolistic or an unlawful circumvention of Commission policy on dual listing of options.
The Exchange states that it has no agreement with CBOE to restrict dual listing of options or
to restrict, monopolize or foreclose any market." Id. at 23522-23.